WTF?! Is Money

What does that make you think? Conspiracy, people pulling strings from behind the veil? Well, it’s not the conspirators, but what money actually means is a complex subject. One that I will tackle in this blog.

WTF is money?

Money is best understood as a ledger system for tracking value and not an actual thing itself. Historically, money has existed only as accounting entries before the coin was even introduced. It is similar to a darts scoreboard; is the scoreboard valuable? No, but the board tracks performance, and enables the game to function.

This is all well and good, but to fully understand money we need to go back and revisit when money was first introduced. Some theories dictate that there was a bartering system, but trading a cow for two chickens becomes difficult when you throw a 3^rd person into the mix. You need to value these items to make sure of a fair deal. Would you trade a shiny Charizard for a Slowpoke? If you don’t understand the items on the trade, you won’t understand the value. You need a universal language or a universal scoreboard. (FYI if you didn’t get that analogy then you were not brought up in the 90s and therefore understand the need for a universal scoreboard!)

History of money

That scoreboard back in 3000BC was the silver value. Mesopotamia used Silver as a scoreboard of value. Your cow is worth 1 piece of silver, therefore you could trade that cow with any other person, regardless of if they actually wanted the cow. Interestingly, they have found drawings which show debts recorded on clay tablets from 3000 years ago. Temples and palaces actually served as modern-day banks. Not sure if they resemble anything of the sorts these days...

It wasn’t until around 600BC that a place called Lydia (now known as Turkey) first minted coins. These coins did not start 'money', all it did was enable trust as the state stamp guaranteed weight and purity, and the coin did in fact resemble the weight of actual silver.

Governments implemented taxes to create demand for currency in that statedom. It wasn’t until 1^st AD the Roman Empire did something known as “currency debasement”, which means they took out the silver from the silver coin, relying solely on the convertibility of the currency by the state. This meant that now a coin is like a government-issued token saying, “We accept this back in taxes”. Handy when you need people in a state to work, why would they work? – To pay their taxes of course.

Around the 7^th Century, China enters the mix with paper-based currency, and around the 17^th Century Goldsmiths issue receipts for stored gold. Which leads nicely to the birth of banking. And here's where things really start to kick off!

When the first banks started to emerge, they realised that not everyone withdraws gold at once, so they begin lending more money than they actually had stored - known as 'Fractional Server Banking'. This in turn, kick started the financial revolution in terms of humanity growth.

A simple example is this - you deposit £1k int the bank, the bank lends out £900. The monetary system now has £1,900. So overnight wealth, and by extension, productivity, has increased by £900.

This leads to “bank runs” which decimate banks and in 1944 - the famous Bretton Woods Agreement was introduced, which pegged USD currency to gold and all other currencies pegged to the USD. But… 30 years later in 1971, Nixon changes the USD to a fiat currency – or, in basic terms, he removes the ability for USD to be converted into gold therefore unpegging it from the gold reserve. This is the final evolution of the standard money in today’s society. It is not really anything; you can’t convert it, but you can spend it with the trust that the state will accept it in taxes.

Now the history of money has been explored, let’s backtrack to the creation of money. Banks do not print money, but what they do is give out loans. When they do this, they effectively print money but in the form of a debit and credit on a electronic banking system. The nearest to this that any of us will see with significant value is mortgages. The bank creates the debt, lends us the money so we can buy our house. The bank may not “have” this money... they don’t need to.

Interestingly 95% of all money created is by bank loans. The other 5% is done via the Central Bank and (thank god!) we are not part of the Euro, we still have the ability to create GBP when we want. Post 2009, and even 2020, the Bank of England did QE (Quantitative Easing) which when explained, sounds mad! They basically print a s**t load of money and then buy their own government bonds. This injects some serious cash into the economy in the hopes of kick-starting economic growth or from 2009 and 2020 to recover from a serious free fall.

So, being a sovereign currency issuer means the 'power to create our own money'. Which leads onto the most asked question of all time - why not just print more money?!

Well, we have the power to print money, but when we do this it increases the quantity of cash in the economy, and supply and demand dictates the more money in the economy, the less demand and therefore, less valuable. That is why the UK will always meet its debt. However, the pain of meeting such debt is passed onto the people as their savings and wealth are devalued by the Government printing more and more money. Thankfully, we have not got there yet and this is why inflation target rate is 2%. Meaning we can print what we like but we aim to get inflation to a healthy 2%.

So I have touched on a few concepts about money, but another very popular question is: if every country is in debt, then who owns that debt? Well, surprisingly the answer to a degree of 80% of all worldwide debt is owned by us. Or more specifically. anyone that has a pension. If you think about it, it makes sense. Pension companies make very long commitments, they'll say "yes, pay money in and we will pay out in 50 years' time" so they need reliable investments that will hold for 50 years. In then comes the Government gilts. Basically, it's an IOU between the investor and the Government. So, pension companies naturally buy these up in droves.

Summary

So in summary, WTF?! Is money, well - it is not really a thing. It is not pegged to a physical material and most of the money in the world is actually debt and has never been printed. This has had a great impact on humanity by increasing productivity by robbing future growth and paying it out today in debt. I hear you all saying “But Lloyd, WTF?! Is Money”, the answer to your question WTF?! Is money, it is this; just a shared illusion we all agree to take very seriously.